Companies Act Section 222

Companies Act, Section 222: Imposition of Restrictions Upon Securities

Section 222 of the Companies Act, 2013 provides the legal framework for the Tribunal to impose restrictions on securities issued or to be issued by a company during an investigation. These restrictions are aimed at ensuring that the company does not engage in any practices related to its securities that could harm the investigation process or mislead shareholders, creditors, or other stakeholders.

This section is especially significant in cases where there are concerns about the transparency of the company’s securities, or where the company’s actions may be in violation of the law. The provisions empower the Tribunal to intervene and impose restrictions to safeguard the integrity of the investigation and protect stakeholders.

1. Conditions for Imposing Restrictions on Securities

Sub-section (1) of Section 222 outlines the specific conditions under which the Tribunal may impose restrictions on a company’s securities. The Tribunal can act in these circumstances:

a. Investigation under Section 216: If an investigation is conducted under Section 216 of the Companies Act, the Tribunal may find it necessary to impose restrictions on securities. Section 216 relates to the investigation of the ownership of shares in a company, so if there is a suspicion that the securities issued or to be issued by the company are related to the matter under investigation, the Tribunal may impose restrictions.
b. Complaint by a Person: If any person makes a complaint to the Tribunal regarding the company’s securities and the Tribunal believes that there is good reason to investigate the matter, it may decide to impose restrictions on the securities in question. The Tribunal must be satisfied that these restrictions are necessary to uncover the relevant facts concerning the securities.
c. Imposition of Restrictions: If the Tribunal is of the opinion that the relevant facts regarding the securities cannot be obtained unless certain restrictions are imposed, it has the authority to issue an order. These restrictions could include preventing the transfer, sale, or issuance of securities in specific circumstances. The Tribunal may impose these restrictions for a period not exceeding three years, and the duration of these restrictions will be specified in the order.
This provision grants the Tribunal significant power to control the handling of securities during an investigation or inquiry, ensuring that no action is taken that could interfere with the investigation or conceal relevant facts. The restrictions are intended to protect the integrity of the investigation process by preventing actions that might otherwise disrupt the collection of necessary information about the company’s securities.

2. Penalties for Contravention of Restrictions

Sub-section (2) of Section 222 addresses the penalties for a company that violates the order of the Tribunal regarding the restrictions imposed on securities. If a company issues, transfers, or acts upon its securities in contravention of the Tribunal’s order, both the company and its officers may face serious consequences:

Penalties for the Company: If the company disregards the Tribunal’s order, it will be subject to a fine. The fine imposed on the company will not be less than one lakh rupees, but may extend to a maximum of twenty-five lakh rupees. This fine serves as a deterrent to ensure that companies comply with the Tribunal’s orders and do not engage in any activities related to their securities that could undermine the investigation.
Penalties for Officers in Default: The officers of the company who are responsible for violating the Tribunal’s order will also face penalties. These officers may be punished with:
Imprisonment for a term that may extend to six months.
Fine which shall not be less than twenty-five thousand rupees, but may extend to five lakh rupees.
Both imprisonment and fine may be imposed, depending on the severity of the violation and the circumstances.
These penalties are designed to hold the company’s officers accountable for any actions that may contravene the Tribunal’s restrictions on securities. Such actions could interfere with the investigation or undermine the protection of stakeholders' interests. The penalties reflect the importance of adhering to the Tribunal’s orders to maintain the integrity of the investigation process and to protect the company’s stakeholders.

3. Purpose and Impact of the Provisions

The primary objective of Section 222 is to ensure that the Tribunal has the authority to prevent any unlawful or detrimental actions involving the company’s securities during an investigation. Securities are crucial to the financial structure and operations of a company, and improper handling of them can significantly impact stakeholders, including shareholders, creditors, and investors.

By imposing restrictions on securities, the Tribunal aims to:

a. Protect the Investigation: Restrictions are put in place to prevent actions that could disrupt or interfere with the investigation. If the company is allowed to transfer or dispose of its securities during an investigation, it could lead to the concealment of critical information, jeopardizing the fairness of the investigation.
b. Safeguard Stakeholder Interests: The restrictions ensure that the interests of shareholders, creditors, and other stakeholders are protected. Without these restrictions, a company could potentially manipulate its securities in a way that harms the interests of its stakeholders.
c. Maintain Transparency: Imposing restrictions on securities during an investigation helps maintain transparency in the company’s financial dealings. This ensures that all actions involving the company’s securities are scrutinized and that relevant facts can be discovered to understand the true state of affairs.
d. Prevent Malpractices: This section serves as a preventive measure against malpractices related to securities. It ensures that companies do not engage in improper transfers or issuances of securities that could negatively affect the outcome of an investigation or inquiry.